ARC Document Solutions, Inc.
Q4 2007 Earnings Call Transcript

Published: 13 Feb 2008

[Operator:]

Greetings, ladies and gentlemen, and welcome to the American Reprographics Company Fourth Quarter 2007 results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the following presentation (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Stickney, Vice President of Corporate Communications. Thank you, Mr. Stickney, you may begin.

[David Stickney:]

Thank you, Rob, and welcome to everyone on the call. With me today are Suri Suriyakumar, our President and Chief Executive Officer, and Jonathan Mather, our Chief Financial Officer. The company's release reporting financial results for the fourth quarter and year ending December 31, 2007 was issued earlier today. You can access it and the company's other releases from the Investor Relations section of American Reprographics Company's website, at www.e-arc.com. A taped replay of this call will be made available beginning about an hour after its conclusion. It will be accessible for seven days after the call. You can find the dial-in number for the replay in today's press release. This call is also being webcast live. A replay of the webcast will be available on our website for 90 days from today, again on www.e-arc.com. Please be aware that this call contains forward-looking statements that fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, regarding future events and the future financial performance of the company including the company's financial outlook. Such statements are only predictions and actual results may differ materially as a result of risks and uncertainties that pertain to our business. These risks are highlighted in our quarterly and annual SEC filings. The forward-looking statements contained in this call are based on information as of today, February 12, 2008, and except as required by law, the company undertakes no obligation to update or revise any of these forward-looking statements. This call will also contain references to certain non-GAAP measures. The reconciliation of these non-GAAP measures is set forth in today's press release and in our Form 8-K filing with the SEC. At this point I will turn the call over to our President and CEO, Suri Suriyakumar. Suri?

[Suri Suriyakumar:]

Thank you, David, and good afternoon everyone. I am delighted to present our fourth quarter results to you today. As we approached the last quarter of 2007, it is clear that the decline in the residential market was playing havoc across the economy. We were faced with uncertain market conditions and a sliding investor confidence in construction related stocks. This also impacted the earnings in our first three quarters, resulting in a significant decline in our stock value. Realizing the importance of demonstrating that American Reprographics can operate successfully under tough market conditions, I challenged my management team to tackle the fourth quarter aggressively, both from a sales perspective and an expense perspective. We took several initiatives and rallied the divisions across the country to inspire them to use our size, our technology and our dominant position in the industry to go after new business and increase sales while we reduced expenses without any compromise. The outcome ladies and gentlemen was tremendous. I am pleased to report that we were able to deliver one of the best fourth quarters in the company's history, in spite of the fact that Christmas fell on a Tuesday, resulting in the loss of several business days in the last week of December. Our fourth quarter results are as follows, with sales of $174.1 million in the fourth quarter, we achieved an 18.5% increase over the same period last year. Clearly, the adjustments we've made to address a softer market, combined with our continuing focused on cost reductions and efficiencies are contributing to meaningful improvements in the uncertain environment. Acquired revenue growth for the period was approximately 12.4% and organic growth for the quarter was 6.1% up from 4.6% in the third quarter. In addition, under difficult conditions, we were able to deliver a gross margin of 41.2% down slightly from 41.6% during the same period in 2006 when the business environment was vibrant. One must also bear in mind that we had a record number of acquisitions in 2007, and acquisitions have a dilutive effect on our gross margin. The company's EBITDA margin for the quarter rose to 25.8%, compared to 23.7% in the same period last year. This is a clear example of how we continue to harness operating efficiencies from our growing business. Actual net income for the fourth quarter of 2007 was $16.7 million or $0.37 per diluted share. We settled the Louis Frey litigation in the fourth quarter for significantly less than the original judgment and the reserve we had established to address it. While we had a gain of $0.05 from this we also had a loss of $0.02 due to the charge we incurred in refinancing our debt. Therefore, the fourth quarter EPS number that most accurately reflects the real performance of the company is $0.33 fully diluted. Again, I wish to state that this is clear evidence that the company and the management is well positioned to operate successfully even under tough market conditions. This will bring us to our annual results. For the full year we reported sales of $688.4 million compared to $591.8 million in 2006. This represents an annual increase of 16.3%. Our gross margin for the year was 41.7%, compared to 43% in 2006. And here again, I want to point to our very aggressive acquisition strategy in 2007, which produced a temporary dilutive effect on our gross margin. The company's EBITDA margin for 2007 was at 25.6% compared to the 2006 EBITDA margin of 22.7%. Fully diluted earnings per share for 2007 were $1.51 adjusting for the Louis Frey settlement and the refinancing charges fully diluted EPS comes to a $1.48. I would also like to point out that our aggressive acquisition activity has escalated our amortization cost by at least $4 million this year reflecting the appropriate purchase accounting rules. From a pure performance perspective, this would have added an additional $0.05 to our earnings per share. In spite of the adverse market conditions and the negative investor sentiments towards the construction related stocks, what we were able to accomplish in American Reprographics in 2007 was pretty significant. Let me give you a brief recap. Firstly, we had a new CFO take charge early this year, after Jonathan Mather joined us in late 2006. He settled in quickly, made several changes and has done a tremendous job in streamlining our financing division. Our finance team has never been so strong. Secondly, my friend and long time business partner, Chandramohan, retired from the CEO position in June. After I took over, we have made significant changes to the management team. I am pleased to report that the management transition has been extremely smooth, as evidenced by our operating results. We are now well positioned to grow the company through the next decade. Thirdly, as I mentioned earlier we made a record number of acquisitions in 2007 entering several new markets, while solidifying our dominance in several important regions, including the Mid Atlantic and Southeast. This is no easy feat. No other company in our industry is able to acquire and consolidate new business like we can. These new companies will significantly improve our ability to serve national customers across the country. Fourthly, we refinanced our debt during a very difficult time. Simply put, we were able to get more money with better terms, in spite of the fact that we are closely related to the construction industry. This is a significant accomplishment in comparison to what we had negotiated several years ago, when the credit markets will much healthier. We, of course, had to withstand significant scrutiny and due diligence from some other top banks in the nation. The fact that we were over subscribed in this effort is a true testament to our company's ability to perform under tough conditions. Fifth, we were able to break down with some significant new accounts in the non-AEC segment of our business. This, we believe, will continue to grow and add value to our business in the future. Finally, our agreement with Unis in China was a significant accomplishment from a long-term perspective. We expect to finalize our permit and commence business activity sometime in the middle of 2008. Our [Asian] program continued to produce excellent results contributing more than 16.5% of our revenue this year with the total of 4,592 accounts at the year end. Digital services, another high margin service line, produced 6.1% of our revenue for the year. The fires in Southern California gave us a scare in early autumn, but in spite of the lost days and recovery time, we came through relatively unscathed from a business point of view. Against the background of significant challenges in 2007, I am proud of our performance on the whole. So that brings to our outlook in to the future. As I stated earlier today, we are cautiously optimistic about our performance in 2008 with a slowing or even recessionary environment we can bring to bear strengths and advantages that no one else has in our industry. Those advantages and strengths, and by that I mean our ability to acquire new companies, leverage technology, offer services and support consistent with our size as well as balance the company's operating capacity, have the potential to deliver real market share gains while other small players are simply struggling to hold on. While nothing is certain, I believe we can continue to deliver solid results in the months ahead. Thus, we are forecasting 2008 revenues to be in the range of $720 million to $760 million. And earnings per share will be in the range of $1.52 to $1.60, on a fully diluted basis. I am sure we'll want to explore some of these issues and others in our Q&A session in just a few minutes. But before we begin, I'll turn the call over to Jonathan for some color behind the financials. Jonathan?

[Jonathan Mather:]

Thank you Suri, and good afternoon everyone. Allow me to provide you with more depth to the numbers we disclosed in the fourth quarter earnings release today. Beginning with revenue by product categories. In quarter four 2007 reprographic services grew 19.7% compared to quarter four in 2006. Digital services, which are included in our overall reprographic services, grew 37.6% year-over-year and contributed 6.7% of total revenue in this quarter, compared to 5.6% over the same period last year. Facilities management grew 9.5% compared to the same period in quarter four 2006, while revenue from equipment and supplies grew 27.2% over the same period last year. Revenue and revenue trend by geographical segment in this quarter were as follows

[Suri Suriyakumar:]

Thank you, Jonathan. Operator we are ready to take the calls.

[Operator:]

(Operator Instructions). Our first question this afternoon comes from the line of Mike Schneider with Robert. W. Baird. Please proceed with your question.

[Mike Schneider:]

Good afternoon, guys.

[Suri Suriyakumar:]

Good afternoon, Mike.

[Mike Schneider:]

All right. First, you can just speak to the guidance, which I am sure would be a hard topic this afternoon.

[Suri Suriyakumar:]

Yes, yes.

[Mike Schneider:]

Can you address as you based on the exit-organic growth rate, your forecast and your modeling for organic growth -- and what amount of acquisition required revenue you have built into the guidance?

[Suri Suriyakumar:]

Okay. Fundamentally the way we're looking at this Mike is that we obviously taking into consideration what's going on in the macroeconomic environment, from my projections, McGraw-Hill projections and every other bit of information we have, and then tie that with what's going on the ground and come up with what we think is a reasonable projection for the year 2008. So based on what FMI has stated -- and we must bear in mind what FMI and McGraw-Hill have stated is at least six to seven weeks old, and since then market has deteriorated further. We are mindful of that, taken that into consideration. And we looked at the three key segments of our market so that is non-res, residential and, of course, non-AEC. So we think the non-res would be down by about 5% over the year based on all of the information we have. And the strategy behind there is, as you know, in the reprographics industry -- we are last in and last out. So while the market doesn't show at least on the ground, we don't seem to have a big negative going on right now. We think by the latter part of the year we'll start to experience some of the effects of what's going on in the larger markets space, relatively the private cash and the cost of capital going up and so on, will start to reflect latter part of the year. With regard to residential, we think residential will be down 5% throughout the year. However the way we are looking at that Mike is that in the early part of the year since we are always comparing quarter-to-quarter so which means that we will compare the first quarter or the second quarter to actually the first quarter of 2007 and second quarter of 2007 so the earlier quarters, the drop will be significant because in early 2007 the housing market was still holding on and it was still sliding. So, the way we look at, it is the earlier part of the year where we will have a higher drop in the housing, and then at later part of the year it will just taper off. With regard to non-AEC, we always tie that to GDP, so we think that will tied to GDP, which is hovering around 1% to 1.5%, but we think because of the fact that we have additional $6 million worth of Boeing business at least $6 million with Boeing coming in. We think the GDP part of it at the non-AEC part of it will grow by about 2%. So the combination of all that is what we took into consideration, and we also took into consideration the fact that we have about $71 million -- am I right Jonathan? -- flowing in from last year. That is the flow through on acquisitions so we did about 688 last year and $71 million flows in. So that is the number that we took into consideration -- we have not built in any acquisitions this year, and we certainly plan to do some acquisitions. But we want be very watchful of the market and be pro active. So we have not added acquisitions into our guidance. Does that give you a snapshot, Mike?

[Mike Schneider:]

Yes. So to be clear the organic growth number if you blend those three markets is basically down, call it 4.5% or 4% for the year.

[Suri Suriyakumar:]

Yes.

[Mike Schneider:]

Is that true?

[Suri Suriyakumar:]

It's down to… it could vary between 3.5% and 4.5%.

[Mike Schneider:]

Okay, and based on numbers -- I guess coming out of your non-risk portion of the business -- can you give us a sense though what you are seeing today, and maybe the trend line during Q4?

[Suri Suriyakumar:]

Absolutely, absolutely Mike, now what we are seeing right now on the ground is pretty encouraging because, to this date, we haven't seen a significant drop in business volumes. What we are experiencing is that projects are slower to start, but the work is coming on. And we are not surprised by that, because, as you always know, we are the last to get in and last to get out from a recessionary cycle perspective as evidenced by the residential cycle as well. So we didn't expect any different. The last quarter turned out to be really good, and of course, like I said in my call, we made a significant changes knowing where those coming on in the last quarter -- we actually started to reacting to the market conditions right away. We put several controls in place, we have several new initiatives, and we drove our sales teams even harder since I took over in June. I have been talking about becoming a more sales-oriented company. So we had already put in several initiatives in place starting from June last year, the impact of which we didn't quite sense in the third quarter because it was too early. But by the time the fourth quarter came in, with all of our additional initiatives, we really did well in the fourth quarter. And that's reflected in the numbers, Mike.

[Mike Schneider:]

Okay. And just a final question, then I'll get back in line.

[Suri Suriyakumar:]

Sure.

[Mike Schneider:]

The breakdown in between AEC growth and non-AEC growth. You did 6% organic growth this quarter, which I think was much better then anybody anticipated. Is the growth coming still out of AEC, or is it like Boeing -- and can you really dissect the organic growth looking at the markets that way?

[Suri Suriyakumar:]

It's hard, Mike. We have not done that before. We don't break it down because obviously they can, but if you just work the Boeing numbers, that's just over 1%, I would imagine, in terms of what we got from Boeing. Everything else is new accounts we have got, and we have some tuck-ins coming along. So it's a combination of numbers there. However, we are confident, like I stated in my call, that given where American Reprographics is positioned, we're really starting to push our dominant position and our new markets, and we are driving the business, and that's why we are confident that whatever the market conditions may be -- even if it is challenging -- I think, relative to the market, we'll do very well. Because I think we are -- we have the right infrastructure. We have the technology. We have the premier accounts, and we obviously have the footprint that is going to allow us to drive this market.

[Mike Schneider:]

Okay. Thank you. I will get back in line.

[Suri Suriyakumar:]

You're welcome.

[Operator:]

Our next question comes from the line of Franco Turrinelli with William Blair. Please proceed with your question.

[Franco Turrinelli:]

Good afternoon, gentlemen.

[Suri Suriyakumar:]

Good afternoon, Franco, how are you?

[Franco Turrinelli:]

Well, but it's snowing hard in Chicago so…

[Suri Suriyakumar:]

Oh, oh.

[Franco Turrinelli:]

Everyone should stay away from Chicago. I was interested in your comments and congratulations on the quarter before I ask my question.

[Suri Suriyakumar:]

Thank you, Franco.

[Franco Turrinelli:]

But on the -- looking ahead, now, you mentioned, and we certainly agree, that that you have increased the sales focus of the organization's sales culture. Where did you really have your sales people focused right now?

[Suri Suriyakumar:]

Right.

[Franco Turrinelli:]

Where were they trying to get that extra little bit of business from your existing customers, or you really challenging them to go get new business? What are you doing on the non-AEC front? What extent can you leverage Boeing? Can you give us a little bit more color on that side of the equation?

[Suri Suriyakumar:]

Sure, absolutely Franco. We can do that. We do -- it's a combination of all the following, which I am going to say number one from our existing customers. Obviously during challenging times we're having a greater sales focus, which means now each and every division. We have over 340-plus sales people across the nation -- that's a moving target, as you know, as you can need to acquire other companies. But our business is basically one-on-one sales directly with our customers and accounts. So, this is basically making sales call. So we have been directing our sales people to do this, but actually for the fact that the focus is much greater now because people from the President downwards are talking about how many sales calls we are making, who are we seeing and what we are doing is; we are doubling the efforts. We are saying tough times call for tough measures. So, we are going out there, and we're going to hustle for the business. So that in itself is one drive. But with regard to whether its -- where it's coming from, it's coming from the existing customers. We are also going after new customers because we do have a larger territory, we do have opportunities like premier accounts, which can cover national customers, and then, of course, we are also going into non-AEC customers like Boeing. With the kind of credibility we have in operating accounts like Boeing, we are going after non-AEC clients and providing that same service. It is also enhanced -- further enhanced by new products we have. So for example, we have our FM strategy, but we have talked about developing smaller FMs for all smaller customers. Because using the same infrastructure we have, same technology we have, we can actually facilitate smaller clients to have in-house facilities at a lower cost but also at lesser administration hassles for us. So we have produced different things like that and come up with strategies to go after smaller FMs and then also provide new digital services where we can actually bring about process improvement for our customers. So it's overall looking at what else can we sell, what infrastructure we have and leverage everything we have. So it's a combination of all, and it's starting to show, and it clearly shows in the quarter results, and I am very encouraged about this year.

[Franco Turrinelli:]

Is the time right for a greater international push, or is the time now to hunker down and make sure the core business is looked after?

[Suri Suriyakumar:]

Right, interesting you asked that question. Whether we like it or not, Franco, we are getting more and more involved from an international perspective. Now last year we talked about this agreement with Unis in China. Obviously that’s moving along very slowly, though, given how you do business in China, that’s coming along very nicely, and we think somewhere middle of the year we'll start full scale operations there. We are working in the final stages. But amazingly what's happening is increasingly we are dealing with projects in London, in Dubai, in Abu Dhabi, in Japan, in France. More and more international projects are being done by architects here, and where they are coming to us is, there're saying, "Look, we're tired of printing all these things and carting these things or shipping these things. Can you guys figure out a way to get these documents delivered for us when we land there?" Which means, we upload all these documents in PlanWell and retrieve documents out of PlanWell. Just in a place like Dubai alone, billions worth of projects, which are going on, and in fact as we talk one of our senior managers is attending a construction conference just in order to see how else we can facilitate that. But to answer your question -- yes, we actually focused on the local market place, that’s a right thing to do because we are still only 12% of the market place, and given our position and dominance in the market place, Franco, we really think we can continue to enhance our precision here in the U.S. But I must tell you though the international business comes our way but virtue of the fact that we service so many large architectural and construction clients.

[Franco Turrinelli:]

One final question, then I'll get back into queue as well.

[Suri Suriyakumar:]

Yeah.

[Franco Turrinelli:]

I mean clearly, they got into you provided -- recognizes the tough environment out there but nevertheless is in line with, certainly our estimates I mean, from our perspective, it seems like we may have reached the bottom. Now listening carefully to your comments, well, I think what you are really saying is that collectively we should expect, kind of a bottom to the summer of this year before things really start to look better both from our end of market and from a comparisons point of view is out there?

[Suri Suriyakumar:]

Yes. I would say that's an accurate, well-put statement.

[Franco Turrinelli:]

Okay. Thank you.

[Suri Suriyakumar:]

Thank you, Frank.

[Operator:]

Our next question comes from line of Scott Schneeberger with Oppenheimer. Please proceed with your question.

[Scott Schneeberger:]

Thanks. Good afternoon, guys.

[Suri Suriyakumar:]

Good afternoon, Scott.

[Scott Schneeberger:]

I guess I am following up on Franco's questions

[Suri Suriyakumar:]

Yes. We don’t -- the pricing has not got affected just yet. Given what's going on in the marketplace -- like I said, before in the reprographics environment and in the construction need, particularly in non-AEC, the business seems to be slightly slower, but it's pretty strong still. So we haven't run into the pricing situation yet. But what can happen, which we expect to happen later in the year, is that if the market gets tough and the works gets difficult to get, then obviously the prices will starts sliding down. Up to now we have not seen any erosion in the price, and we don’t expect that to happen in the early part of the year. I think though in the middle and the later part of the year if market tracks the way it's tracking currently there's a chance that the pricing can slide.

[Scott Schneeberger:]

Okay. Thanks that's helpful. I guess for with the guidance, is there anything interesting we should know about number of days year-over-year or -- and then any thoughts on what you are looking at on the costs lines that we should think about as we move forward in '08?

[Suri Suriyakumar:]

Right. The number of days I can give you a quick snapshot of that. In 2008 we would have one day extra. We would have 64 days in quarter one, 64 in quarter two, 64 in quarter three, and 63 in quarter four that's the grand total, that's a day more than 2007 and two days more than 2006. But as you know, Scott it also depends in some instances -- what happens depends on where the holidays fall. So if a holiday falls -- for example, this year was devastating because Christmas fell on a Tuesday. So people take Monday off, and then Tuesdays off and Wednesday, nobody shows up to work and inadvertably many close -- offices are closed Thursday, Friday as well. So that might on the other hand if Christmas falls on Monday, it's just perfect for us. So those other than those in 2008, we expect to have 255 days and quarterly the breakdowns I gave you. What -- did you ask something else, Scott?

[Scott Schneeberger:]

Yeah, just on the cost lines how we should be thinking about the cost lines in the margins as we look at 08?

[Suri Suriyakumar:]

Jonathan pointed out this as well. One of the things which affects our margins is that when we acquire companies, the operating margins tend to slip. But we believe, based on what we're doing, that there's no reason to expect the current situation to slip any further because we have done about a 107 -- $130-million worth of acquisitions last year, and we are continuing to improve those companies. Some of them were done in the later part of last year. So there will be some improvement, and there is not a whole lot of acquisitions we are trying to line up. Obviously in January we are watching to see what turns market take. We want to be careful about what we are acquiring. So I don't expect the margin to slip down a whole lot. I think we will hold similar margins to 2007.

[Scott Schneeberger:]

Okay. And I guess should we be thinking that the guidance doesn't include much for acquisition. And you say that you're being cautious at the start of the year. Wouldn't this be a good time might multiples lower to acquire, or you really would be cautious as we proceed?

[Suri Suriyakumar:]

Right. First thing we have not included any acquisitions in the guidance. We have not included that, so the numbers I just have cleaned as they come. When we do acquisitions, then of course, then we'll do the right thing, and let the market know and make the changes required. With regards to the acquisition, what we're planning to do is, Scott, as I said before, because in the reprographics industry we are last in to last out the companies really haven't felt the pain not just yet, everybody knows the market is tricky, everybody knows the market is volatile, but the impact of that is not realized just yet. And it will be in the middle of the year or latter part of the year. That's when we have that opportunity you are talking about where we could be buying it at a lower multiple. Now we already have taken that position with the people we are taking to. So the way we look at it is we take as you know we buy in trailing 12 months EBITDA and we have a four to six multiples. That's our usual strategy in acquisitions. What we're doing now is we are taking the trialing 12 months EBITDA, and we give that a 10% to 15% cut so to speak knowing very well the market is going to slip. And then we say instead of buying closer to six, we will try to buy it closer to four. That’s our fundamental strategy, and that’s the right thing to do. However for that that to really take foothold, we are probably looking at second and third quarter because the market is very volatile, and we certainly don’t want to approach anybody at this point of time who has fairly good results in 2007, and we don’t want to take those numbers for granted because we are fairly certain particularly with small operators they will run into some rough waters later in the year.

[Scott Schneeberger:]

Okay, thanks. Just to have one real quick one, if I can sneak it in, Jonathan

[Suri Suriyakumar:]

You're right on. We didn’t assume any share repurchase that we may do during the 2000 year.

[Scott Schneeberger:]

Okay, thanks very much, guys.

[Suri Suriyakumar:]

Thank you.

[Operator:]

Our next question comes from the line of Al Kabili with Goldman Sachs.

[Al Kabili:]

Hi, good afternoon, guys.

[Suri Suriyakumar:]

Hi, Al, good afternoon.

[Al Kabili:]

Hi, just also a question on the guidance in terms of the gross margins. I think you highlighted you are hoping to keep them flattish in 2008 or maybe slightly down, but given organic growth potentially being down in 2008, and seeing negative fixed cost absorption as a result of that, how do you keep your gross margins flat in that environment?

[Suri Suriyakumar:]

Because -- that’s a good question. But what will happen – also, don’t forget that we have acquired about a $130-million worth of companies, and we will have margin improvements in those companies. I mean they obviously, we can't take anything for granted, but the good thing about our business is because we added on a $130 million plus worth of business, we now have the chance to consolidate them and improve margins, and we do that. We generally do that in 90 to 120 days, the 3 to 5 points, and then our theory is, 12 to 24 months we bring them up to 20%. However, in a tough marketplace, it might be tougher, but we are fairly certain given that we have such large volume of acquisitions, and the fact that we are working hard on controlling expenses and improving performance. We can still deliver those numbers. We are very comfortable with that now.

[Al Kabili:]

Okay. And update if you could on fixed costs as your cogs -- the costs of sales breakdown, fixed costs. So they are still about 60% of the total?

[Suri Suriyakumar:]

Jonathan, would you like to add?

[Jonathan Mather:]

Yeah. What we have for internal purposes what we are using is a 50% tile -- 50% of costs call it somewhat fixed.

[Al Kabili:]

Okay. And then any opportunity, you highlighted cost savings in the fourth quarter and certainly the year-over-year margin comparison, certainly improved versus the last couple quarters, any opportunity for additional cost savings in 2008. And if so anyway you could help us quantify or think about that?

[Suri Suriyakumar:]

It's hard to quantify that but what would be our general strategy is that obviously during 2007 -- particularly in 2006 and 2007 -- we were growing very fast. We had significant number of acquisitions. So if when the market is so good and the business is so good, it's hard to keep the costs down and control it, particularly when you are growing very aggressively. What we have now going on is that from the last quarter onwards a tremendous focus on keeping the costs down. So it's hard to quantify, but I think as we go along again for the same reasons because we have acquired companies. We can continue to trend those costs down. I would not venture to quantify them, but I think we will continue to improve the performance in those companies, which will contribute to our numbers.

[Al Kabili:]

Okay, got it. And then I guess on the share repurchases versus acquisitions that an earlier color I asked about, yeah I think given in the short-term your more-cautious outlook on acquisitions, how do you balance that with share repurchases this year? Is this an opportunity in the near-term to use the extra free cash flow you are generating for share repurchases, or do you see increase in cash for dry powder down the road for acquisitions?

[Suri Suriyakumar:]

Sure we'll -- the very interesting part of our business is that I have always said this we will every year we are almost able to do all of our acquisitions with our own cash and that is because we have very strong free cash flow in the company. Of course due to timing differences because in some instances when equity sponsor spells the company will have to pay all cash we might need the cash. But pretty much we have a very strong, free cash flow, and we are able to finance our acquisitions through our own cash. In addition to that as we talked about it earlier, we did refinance our debt, and so we do have dry powder left. So fortunately we don't have to make the choice of whether to buy shares or acquire companies. We can do both at the same timing in a balanced way. But what the current market conditions are presenting to us is that we must be cautious about acquiring companies not knowing which way it's turning. Once we get a feel for how the market is going, then we can move on the acquisitions. Obviously our pipeline was full, even as of end of last year, and we still have a lot of companies who are interested. We are just slowing it down in order to make sure that we keep it at the right time, at the right price and we want to be very opportunistic about it.

[Jonathan Mather:]

I may add to what Suri said, and I think also to get a little bit more specific to that your question with respect to the share buyback. Absolutely what Suri has talked about on M&A et cetera, but our credit agreement has certain limitations. As you know, last year we did have a release where we said the Board approved credit agreement even allowed us to buy up to $200 million, our Board approved up to buy $150 million. But again, we are only so much we are allowed to buy under the credit agreement based on our operating cash flow. The bigger chunk of it has to bought with a sub-debt. So there are some limitations to the cash as to how much we can use to buy stock.

[Al Kabili:]

And can you update us how much right now is available for stock repurchase, and I missed how much you have already, you have purchased in the first quarter?

[Jonathan Mather:]

Yeah, I said in the call earlier, we have already spent in the fourth quarter last year. During our open window that we could buy back, we spent $7.7 million. Okay, that's out of our operating cash flow. Now the credit agreements are filed, you can go into that. Basically, we could buy on an annual basis another on a $10 million with a maximum $15 million on the whole agreement. So the real chunk of what we can buy in the stock buy back is coming from by issuing sub-debt.

[Al Kabili:]

Okay. And then…

[Suri Suriyakumar:]

So, fundamentally, sorry go ahead…

[Al Kabili:]

No, I am sorry.

[Suri Suriyakumar:]

I mean, fundamentally, the answer is that if we were to do meaningful stock buy back that probably will be using a sub-debt avenue, rather than the cash generated by us.

[Al Kabili:]

Okay, got it, And then final question on California, I think it's Southern California where you saw, actually, a decline in revenues, and if you could just give us some color there? Is that just the bulk of that, at this point, still residential, or are you also seeing some weakness now in the non-residential markets down there as well?

[Suri Suriyakumar:]

Mostly it's on the residential, that’s what we have seen. The non-res hasn’t taken a hit yet. Obviously, the path which grew very fast was the Southern California residential market. And also last year when the bottom fell off, the path which fell apart is the fact that, while the rest of the nation was down 20% to 25%, Southern California was down 40% plus on the residential. We don’t see any negativity on the non-res part of it at all. But I think the impact which is brought about by Southern California will be lesser this year, but it will still be there, a little bit of negative effect. But what we are doing is, we are focusing our energies on non-residential and non-AEC accounts, which is the right thing to do.

[Al Kabili:]

Okay, thank you.

[Suri Suriyakumar:]

You're welcome.

[Operator:]

[Operator Instructions]. We have a follow up from the line of Mike Schneider with Robert W. Baird.

[Mike Schneider:]

Suri, can we spend a minute on PlanWell? Just what impact, if any of these spending cuts is being taken on a PlanWell, just the momentum of PlanWell as you finish the year? And again, maybe what you expect on a PlanWell in the coming year, given the software markets?

[Suri Suriyakumar:]

Sure, sure the spending cut's none whatsoever, Mike. In fact, we probably are spending more money on PlanWell. And the reason I am saying that is, one of the things which is very positive for us in a downturn or in a recessionary environment, is that people are always looking to save money. That is, the customers are looking to save money and improve the process. And that's where PlanWell becomes useful. We can now go to customers’ offices, and talk about process improvement and reducing time and money. Yeah, so we really believe in an environment like this, we will actually have a positive impact with regard to our digital sales, because people did not consider digital before, because they were too busy, and they thought it will take too much time for them to learn, will now look at the products and say, yes we would like to use it, yes, we would like to save money. So our technology expense has not gone down and we don’t expect to trim that down. We expect that to stay where it is, and in fact if we have to build on it, we are not reluctant to build on it. So, obviously there are few areas we are investing it. The areas we are investing in are sales and marketing. You have new products, new strategies for marketing and getting across to the customers, premier accounts, and technology is definitely one of them. For example, we had a couple of new tools actually services that we are trying to develop for premier accounts to further enhance premier account's position. So that we can go after national account, and that we really believe this year premier accounts will take off, and I can sense that already.

[Mike Schneider:]

Okay. And the PlanWell position, I guess, do you have any idea as to how many licenses you have out now, and I guess to the extent you can what the market share you believe you have in the digital realm?

[Suri Suriyakumar:]

Sure. In terms of the locations we are up to 344 locations with PlanWell technologies, in peer we have 205 members. So that is continuing to grow very nicely. Now we are posting between 700,000 and 800,000 new documents per month on PlanWell, so that part is going very well. So all of the initiatives from a FM PlanWell part of it is going on very well. We continue to fine tune the internal features of PlanWell based - a feature which is called BidCaster. We upgraded certain elements of BidCaster again, based on how people using it, what they are applying it for. So the technology continues to improve and we will continue to announce those technologies, and bring about additional technologies for distribution of documents, because that is becoming more and more a common concern for all of our customers. They are saying, why do we have to have such large numbers of documents printed and FedExed or UPSed? Why can't you accomplish that for us digitally, given the fact that you are in 300 and plus locations, we are now in 308 locations. And what we are using is, we are starting to investigate and develop technologies which can take large files, convert them, and rip them across the nation and have them printed and delivered. We'll start what we call remote printing features. We are starting to develop that, Mike, and it's coming along very nicely.

[Mike Schneider:]

Okay. And then just a more conceptual question. With non-res being forecasted to be down 5% in '08, can you at least position that relative to some of the pressures on printing volume, have you assumed that in '08 we see some acceleration in the rate of decline of printing from whether it's half sized printing or selective printing by certain contractors etcetera, or is it just the market decline of 5%. You are anticipating no real reduction in true printing volume?

[Suri Suriyakumar:]

The last part is the correct one. We are just basically looking at the market decline and that's an estimation based on the information we have on the macro economic climate. I mean, that is not a specific identified target. We're just looking at the macro economic environment. Given all the projections, we believe based on the information we have, particularly the latter part of the year will soften down. But in terms of the printing volumes we really don't think that will come down. Now, the only thing which can impact the printing volume is that the customers start to use more digital, because that's to their benefit. However, that is offset by the fact that we are aggressively expanding our FM base. We continue to sell more FMs, and by selling more FMs what we do is we capture those clicks. So that's often offset. In fact we will have additional flicks. I think what we gain out of FMs would be more than what we lose out of half sizes or digital transition. So we don't expect to see any meaningful decline in our print volumes.

[Mike Schneider:]

Okay, and then actually good segue to these FMs business. It was actually flat sequentially in dollars. Can you give us some color because you've obviously been adding tens of clients if not hundreds of clients each quarter, why would revenue have been flat?

[Suri Suriyakumar:]

Mike I don't have the exact numbers in front of me, but I can explain that to you. Because one other thing which happens with FMs is that, when we acquire companies we have a certain number of FMs which come along with it. For example, if you take the fourth quarter, I have the number, we have total of 402 FMs, 107 of that was acquired. Then I can tell you, based on what I know from what we generally experience in this marketplace, the profitability or the numbers in those 107 would be vastly different to the 300 plus or we have sold, because it's just we sell FM as a strategy, and our buying power and our leveraging is much greater. So what happens is, the numbers gets queued with the acquisitions. But one of the things we do is, as we get into those FMs, then we look to upgrade those FMs or make changes in those FMs as those contracts come up or go to customers with upgrades in order to bring them up to [par] with what we have.

[Mike Schneider:]

So the revenue being planned sequentially is that a round about way of saying you are pruning less profitable FMs at this point.

[Suri Suriyakumar:]

No. I mean that we have brought FMs from outside and the revenues might be impacted by the fact that they are not all FMs that we signed.

[Sathiyamurhty Chandramohan:]

And then as I recollect in 2006, we also had a couple of $100,000 or would be $500,000 to $600,000 to catch up on FM revenue in the last quarter of 2006.

[Suri Suriyakumar:]

Into '07.

[Sathiyamurhty Chandramohan:]

In '06 fourth quarter. So fourth quarter '06 had FM revenue slightly higher than real billings, because of all the catching up making sure everything was billed through end of 31 December.

[Mike Schneider:]

Okay and then…

[Suri Suriyakumar:]

We'll do a lot of research on that and give you a little more color.

[Mike Schneider:]

Okay, fair enough. And then just final question, just on the sales initiatives, can you give us some sense, Suri, as to what initiatives that were implemented during the middle of the year are indeed gaining traction at this point in driving the organic growth.

[Suri Suriyakumar:]

Sure, sure. Overall what we established is, we realized that in acquiring the companies, we just take our business model and look at how we operate. Fundamentally what's happening is we are a company spread across the nation with different brand names, so we are 44 plus brand names and they are very much independently run because these are individual entrepreneurs that we acquire and we maintain those brand names and then we pretty much different on these independent entrepreneurs to drive the [staff]. So when we decided okay, we really need to focus on sales, we brought about more of a simple strategy to selling which we didn't have before. Previously we would say, okay we have these products, we have planned now, we have MetaPrint, we have Abacus, these tools and these technologies are past on to these divisions and the local presidents and local CEOs decided what they would sell, how they would sell and which one is applicable to their customers. We never had a central selling strategy. What we did in the middle of last year is, when we started this initiative, we created a team in the corporate office and we got a group of CEOs and we said, okay, from this room we are going to drive sales aggressively. We are going to monitor sales in every company, in every division and break it down by segments, and follow up on what's going on. So we have a room in here in the Walnut Creek office where three or four of the CEOs and [company] executives sit and across the walls all the numbers are posted. They are live numbers, which means on a daily basis the numbers are updated. So we call them the war room. Actually it's a funny name, and if you come here it will say, war room, do not enter. And what happens there is that the numbers are posted, so basically on a live basis you can actually ask a president of a company, why is that the second week of the month your sales are lacking which areas are you falling a short, what do you need in terms of help, do you need training, do you need equipment, is it a customer problem, whatever that might be. And then what happens is that every three or four weeks, we would actually have conference calls where we would have all other presidents of the divisions broken down to four groups, and I would sit on those conference calls and quickly review sales performance. What's going on? How are you tracking? What's happening in the sales? And all those divisions where they are failing to meet the budgets, we take corrective actions. What should we do different, do you need help, do you need our sales consultant to fly down, do you need somebody from another office come and teach you about FMs because you're falling short in FMs. So it's much more hands on, much more directive, specifically controlled strategic as against in the past we've always had the divisions say, these are entrepreneurial divisions, we buy companies, and we let them run with their own sales strategy. Now the sales strategy is directly directed from the corporate office, and in many instances that comes off my office.

[Mike Schneider:]

Okay, thank you again, guy.

[Suri Suriyakumar:]

You're welcome.

[Operator:]

Our final question of today comes from the line of [John Emrits with Ironworks Capital].

[John Emrits:]

Thanks, a couple of unrelated questions, if I'd asked separately. What is the approximate tax rate you are using for next year?

[Suri Suriyakumar:]

Jonathan.

[Jonathan Mather:]

38% we will use for 2008.

[John Emrits:]

Okay. And what is the discrepancy - what allows the discrepancy, if you will, between your depreciation and your capital expenditures, and is that sustainable?

[Sathiyamurhty Chandramohan:]

Okay. The main item is capital leases. In the cash flow, at the bottom of the cash flow, you see the number of capital leases we have entered in to and that is depreciated.

[John Emrits:]

Okay.

[Sathiyamurhty Chandramohan:]

But it's not reflected in the cash flow as capital expenditure because it is not capital expense.

[John Emrits:]

Got you. And you were walking through, in the question about your organic growth assumptions for 2008, you walked through non-res minus-5 and res minus-5. Were those assumptions about your organic growth within those segments or the end market organic -- market growth, if you will, in those segments?

[Suri Suriyakumar:]

Based on what we know from the market, the macro market and the information we have. So the way we look at that is to find out information, we track FMI very closely, McGraw Hill, the Architectural Billing Index, and then of course any information which comes out of the US Census Bureau. And then we have information on the ground. So it's monitoring all of that and then marrying it with the information we have, and coming up with what we think is the projection for us. So it's actually - we are projecting that our non-res will be down by 5% and our residential business also will be down by 5%. I clarified that earlier in the year, it will be down by a larger percentage and it will tail off during the later part of the year, and then of course non-AEC we think it will grow by 1%. We always said it tracks GDP.

[John Emrits:]

Let mean drill down on one. For instance, in residential construction, it’s finally being more widely accepted and I subscribe to it that, housing starts are going to be down in other 20% in '08 versus '07.

[Suri Suriyakumar:]

Right.

[John Emrits:]

Starting with that number, how do you get back to minus-5% organic growth rate for you guys?

[Suri Suriyakumar:]

Right. If you breakdown our business, our business breaks down 65% of our business. Traditionally we have always said, 65% of our business is non-res

[John Emrits:]

Right

[Suri Suriyakumar:]

15% of our business is residential and 20% of our business is non-AEC and that was non-construction related.

[Suri Suriyakumar:]

Right.

[John Emrits:]

Last year when we took the sample after going through what we have gone through, our non-res has gone up to 68. 4%, and then our residential has come down to just under 12%.

[John Emrits:]

Okay.

[Suri Suriyakumar:]

So, the way we look at it is, we look at our 12% business and say, and that is not necessarily consistent across the board, because in places like Southern California we had a high percentage. So what we did is, we took that business and said, if 15% or 12% of our business would be down by 5% and why do we say 5%, because from our perspective what we are seeing is that if you compare our - for example let's take an example, lets take our first quarter numbers. If our first quarter numbers were compared to what you call 2007 first quarter, we think that will be down about 10%.

[John Emrits:]

Okay.

[Suri Suriyakumar:]

And we don’t think it will go down any further, but I think it will down 10%. Because what happens is in 2007 the numbers got increasingly worse.

[John Emrits:]

Sure.

[Suri Suriyakumar:]

From 2007, first quarter and second quarter. So the difference is going to be in 2007, we think we will be down first quarter about 10%, second quarter 7.5%, third quarter 5% and the last quarter maybe 2.5%.

[John Emrits:]

Okay.

[Suri Suriyakumar:]

That’s how we came out on an average of 5%.

[John Emrits:]

Okay. And if you don’t mind my asking you, is your Q1 business for residential actually trending only down 10%?

[Suri Suriyakumar:]

Yes. In general, when we’re looking at it, we’re actually very comfortable. In fact, we were talking this morning, it looks like it's keeping track, because from our perspective, we feel like the residential has fairly bottomed out. I mean, I know the whole residential market as a industry is going to be suffering a heck of a lot more because it involves mortgages, finances all over. But if you look at the construction side of the business, almost all of the houses which were in the pipeline are almost constructed and finished.

[John Emrits:]

Right.

[Suri Suriyakumar:]

So as a result, we don't see it will affect us as much as it will effect the overall industry.

[John Emrits:]

Okay. And then last question is, you did just refinance, I think. What is the debt covenant, of all the debt covenants you have, that you are closest to understanding that you have a lot's of room to begin with. But is it a ….

[Suri Suriyakumar:]

Yes.

[John Emrits:]

That's EBITDA or interest coverage, what would be closest to?

[Suri Suriyakumar:]

Jonathan?

[Jonathan Mather:]

If you look at our debt covenants, we have plenty of room. One that I watch very closely is the fixed coverage and interest coverage, etcetera.

[John Emrits:]

Yeah.

[Jonathan Mather:]

You have plenty of room. So if, to answer your question specifically, the one that I would be closest to is on capital expenditure. I'd love to spend $15 million a year, and last year we spent 8 point something million dollars. You can just imagine the amount of room we have in our covenants.

[John Emrits:]

Sure. Got it. Thank you very much.

[Jonathan Mather:]

You're welcome.

[Operator:]

Ladies and gentlemen we have reached the end of our allotted time for questions. I would like to turn the floor back over to management for closing comments.

[David Stickney:]

Thanks everyone for joining us today. We appreciate your interest and continuing support of ARC. If you have any further questions, please feel free to call our corporate offices and ask for me specifically, David Stickney at 925-949-5100. Thanks very much for your attention and your respect. Good night.

[Operator:]

This concludes today's conference, thank you for your participation.